STRATEGIC RESPONSES ADOPTED BY KENOLKOBIL LIMITED

TO CHANGES IN THE BUSINESS ENVIRONMENT IN KENYA

BY

KINYANJUI S. NDIRANGU

A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILLMENT

OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS,

UNIVERSITY OF NAIROBI

NOVEMBER 2013

DECLARATION

Student’s declaration

I declare that this project is my original work and has not been submitted for a degree in

any other university or college for examination/academic purposes.

Signed …………………………………. Date………………………

Stephen Ndirangu Kinyanjui

Reg. No: D61/70177/2009

Supervisor’s declaration

This research project has been submitted for examination with my approval as the

University supervisor.

Signed …………………………………….. Date ………………………

Professor Evans Aosa

Department of Business Administration

University of Nairobi

ii

DEDICATION

This study is particularly dedicated to my wife Purity and our children Susan and Martin,

who supported and encouraged me in the completion of this project.

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ACKNOWLEDGEMENT

I would like to take this opportunity to give thanks to the Almighty God who makes all

things possible. God has blessed me and has seen me through the completion of this

project.

A study of this nature is usually a product of various efforts and I am grateful to all those

who helped me to accomplish this study. While it is not possible to name all of them,

recognition has been given to a few. My special thanks go to my supervisor Professor

Evans Aosa for his invaluable professional support, advice, and unlimited patience in

reading through my drafts and suggesting workable alternatives, my profound

appreciation to you. I would also like to thank all the academic and support staff in the

School of Business, University of Nairobi for their dedication and support.

The senior management of KenolKobil Limited cannot pass without my special

acknowledgement for taking time of their busy schedule to provide me with all the

information I needed in the course of the research. Without their immense cooperation I

would not have reached this far.

Thank you all and may the Almighty God bless you abundantly.

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ABSTRACT

Organizations are environment serving and have to align themselves well to cope with the ever changing business environment. Every organization depends on the environment for its survival and prosperity. Today’s business environment is dynamic, complex and highly competitive. Thus, every organization encounters numerous changes in its environment and needs to adapt its strategies in response to these changes. This study sought to identify changes that have occurred in the environment that have affected KenolKobil and how the company has strategically responded to these changes. Data collection was done through a case study approach that sought to elicit general and specific information on changes in business environment and how the company has responded to the changes. Data analysis method applied for this case study was content analysis. This enabled focus on issues that bring out the theme of changes in the environment and how organization strategically responds to these changes. Research findings from the study indicate that the biggest threat to the future survival and profitability of KenolKobil is government regulation on fuel prices. The second threat is expansion strategy by rival oil marketers. This study has confirmed that KenolKobil has put in place strategies to position itself ahead of the competition. Since the biggest threat to KenolKobil is regulation of fuel prices, the company has embarked on a regional expansion strategy to become a Pan-African oil marketer. In view of the findings, the study recommends KenolKobil together with other oil marketers to lobby the government to remove fuel price controls to allow free market dynamics and industry self-regulation. Equally, important is to get a strategic partner to inject capital for the regional expansion strategy, and/or issue corporate bond to finance the expansion strategy. Since the study was on one oil marketer, data gathered might differ from data that may be collected from other oil marketers. This is because different organizations even if operating in the same industry adopt different strategies even for a similar change in the business environment. The study also faced a number of challenges. Two main ones were time and financial constraints.

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TABLE OF CONTENTS

DECLARATION…...……………………………………………………………ii

DEDICATION.………………………………………………………………….iii

ACKNOWLEDGEMENT………………………………………………………iv

ABSTRACT..……………………………………………………………………..v

CHAPTER ONE: INTRODUCTION..………………………………………..1

1.1 Background of the study. .………………..………………… ..................... 1

1.1.1 Environment dependence……………………………………………….2

1.1.2 Strategic responses……………………………………………………...4

1.1.3 The oil industry in Kenya. .…………………………………...………...5

1.1.4 KenolKobil Limited……………………………………………………..8

1.2 Research problem ……………….……………………………… ............... 9

1.3 Research objective ………………………………………………………..11

1.4 Value of the study ……………………………………………. ................. 11

CHAPTER TWO: LITERATURE REVIEW……………………… .............. 12

2.1 Introduction………………………………………………………………..12

2.2 Concept of strategy ……………….………...…….......... ………………..12

2.3 Organizations and the environment ...………………………………… .... 14

2.4 Strategic responses…………………………………………………...……16

CHAPTER THREE: RESEARCH METHODOLOGY..……………………19

3.1 Introduction …………………………………………. ............................... 19

3.2 Research design……………………………………………………………19

3.3 Data collection …. ………………………………………………………..20

3.4 Data analysis …………………………………………………. ................. 21

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CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION …..22

4.1 Introduction …………………………………………………………………...22

4.2 Environmental Changes Facing KenolKobil ..………………………………..22

4.3 Strategic Responses …………………………………………………………. 24

4.3.1 Strategic Alliances and Partnership...…………………………………...24

4.3.2 Regional Expansion …………………………………………………….25

4.3.3 Outsourcing……………………………………………………………...26

4.3.4 Aggressive Marketing …………………………………………………..27

4.3.5 Low Cost Strategy ………………………………………………………28

4.3.6 Vertical and Horizontal Integration …………………………………….28

4.4 Discussion……………………………………………………………………..29

4.4.1 Comparison with Other Theories...……………………………………...30

4.4.2 Comparison with Empirical Studies…………………………………….30

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ..32

5.1 Introduction ……………………………………………………………………32

5.2 Summary of findings ………..…………………………………………………32

5.3 Conclusion ……………………………………………………………………..33

5.4 Recommendations …….………………………………………………………..33

5.5 Limitations of the study ..………………………………………………………35

5.6 Suggestions for further research………………………………………………..35

REFERENCES……………………………………………………………………36

APPENDICES …………………………………………………………………….39

APPENDIX I: LETTER OF INTRODUCTION ……………………………….39

APPENDIX II: INTERVIEW GUIDE…………………………………………. ...40

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CHAPTER ONE: INTRODUCTION

1.1 Background of the study

All organizations operate in an environment that is characterized by constant changes.

Machuki and Aosa (2011) noted that from time to time, organizational environments

undergo catastrophic upheavals which lead to changes that are so sudden and extensive

that they alter the trajectories of entire industries, overwhelm the adaptive capacities of

resilient organizations, and surpass the comprehension of seasoned managers. As the

pace of changes in external environment accelerates, organizations’ survival and

profitability depends on devising strategic and operational responses to unforeseen

discontinuities. Thompson, Strickland, Gamble and Jain (2008) have also noted that

insightful diagnosis of a company’s external environment is a prerequisite for managers

to succeed in crafting a strategy that is excellent fit with the company’s situation, is

capable of building competitive advantage, and holds good prospect for boosting

company performance.

All industries are characterized by trends and new developments that gradually or

speedily produce changes important enough to require a strategic response from

participating firms. Organizations operate in a macro-environment shaped by influences

emanating from the economy, population demographics, societal values, governmental

legislation, technological factors and the industry and competitive arena in which the

company operates (Thompson et al., 2008). An organization’s macro-environment

includes all relevant factors and influences outside the company’s boundaries.

Strategically relevant influences coming from the macro-environment can sometimes

have a high impact on a company’s business situation and a very significant impact on

the company’s direction and strategy. Companies have to craft strategies that are

responsive to changes in the operating environment. Changes in the macro-environment

may occur rapidly or slowly, with or without advance warning and the impact of these

changes on a company’s choice of strategy can range from big to small.

1

The management of the company must scan the external environment, stay alert for

potentially important developments, assess their impact and influence, and adapt the

company’s direction and strategy as needed. The factors and forces in a company’s

macro-environment having the biggest strategy shaping impact typically pertain to the

company’s immediate industry, competitive environment, actions of rival firms, buyer

behavior, and supplier-related considerations.

The oil industry has in the recent past witnessed significant changes in the operating

business environment. Therefore, oil companies have to review their strategies and

respond appropriately to the changing macro-environment. The size and nature of the

market place for petroleum products in Kenya has emerged significantly over the years

attracting many players. According to Sambu (2010), the market of 40 players is under

the influence of four firms, French oil giant Total is the leader, KenolKobil, a public

quoted compared is the second major player and the other two major players are Kenya

Shell and Oilibya. The government has also invested in the industry through the

government owned National Oil Corporation of Kenya (NOCK), Kenya Petroleum

Refineries Limited, Kenya Pipeline Corporation and market price regulator Energy

Regulatory Commission (ERC). Other players are private limited companies including

Gapco, Engen Limited, Hass Petroleum Company, Gulf Energy, Galana Oil Company,

Mogas Oil Company and other small independent players.

1.1.1 Environment dependence

Organizations are open systems that get their inputs from the external environment,

process the inputs into products which they offer to the environment as goods and

services. Generally, organizations are not immune to environmental turbulence and have

no ability to stop the discontinuous changes in the environment. The best they can do is

to respond to the changes in order to reduce the adverse effects on the company’s

operations and performance. Changes in the macro-environment may occur rapidly or

slowly, with or without advance warning and the impact on a company’s choice of

strategy can range from big to small.

2

Weihrich and Koontz (1993) have noted that all managers, whether they operate in a

business, a government agency, or a church, must in varying degrees, take into account

the elements and forces of their external environment. While they may be able to do little

or nothing to change these forces, they have to respond to them. Managers scan the

external environment and must stay alert for potentially important developments, assess

their impact and influence, and adapt the company’s strategy as needed.

The external environment that all organizations interact with consists of political,

economical, social, technological, environmental and legal environment. Machuki and

Aosa (2011) have noted that within Organization Theory (OT), organizations have been

conceptualized and researched as open systems engaging in transactions with their

environments. Thus, the organization can be viewed as an “open system” that affects and

is affected by its environment. It is important for the management of the organization to

maintain an accurate and current awareness of important aspects of and trends in the

organization’s external environment. A number of major companies have lost dominance

or gone out of business because of their failure to recognize and adapt to changes in their

environments, or by failing to be leaders in making necessary changes.

Thompson et al., (2008) have noted that all companies operate in a ‘macro-environment’

shaped by influences emanating from the economy at large, population demographics,

societal values and lifestyles, governmental legislation and regulation, technological

factors, and closer home, the industry and competitive arena in which the company

operates. A firm’s macro-environment includes all relevant factors and influences

outside the firm’s boundaries. Strategically relevant influences coming from the macro-

environment can sometimes have a high impact on a company’s business situation and

have a significant impact on the company’s direction and strategy.

3

1.1.2 Strategic responses

To optimize profitability in a turbulent environment, the responsiveness of an

organization’s strategy must match the turbulence in the environment but also the

organization’s capabilities should match the aggressiveness of its strategy. Therefore, the

logic relating environment to strategy and in turn to performance is compelling, but

empirical demonstrations of the relationships have only recently been made for

developed countries (Machuki and Aosa, 2011). In essence, an organization’s external

environment has implications for its performance.

Companies have to craft strategies that are responsive to environmental regulations,

growing use of the internet and broadband technology. However, the factors and forces

in a company’s macro-environment having the biggest strategy-shaping impact typically

pertain to the company’s immediate industry and competitive environment, the actions of

rival firms, supplier-related considerations and so on (Thompson et al., 2008).

Butler, Dickie and Naude (2010) have noted that nowadays corporations are challenged

by dynamic environments with a rapid speed of changes, burgeoning complexity and

increased uncertainty. Firms must be able to cope with unplanned situations which

cannot be predicted in advance. Therefore, organizations are constantly engaged in

discovering the unknowable and their strategy has to assist them in this process in order

to enable their firms to manage crises.

According to Butler et al., (2010) turbulent environments call for organizations to detect

and create new opportunities and then select those that are worthy of actual resource

allocation in order to be exploited for the firm’s benefit. The ability of firms to benefit

from new opportunities requires them to develop new resources and dynamic capabilities

over time rather than protect their unique resources.

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1.1.3 The Oil industry in Kenya

Oil plays a significant role in the global economy and is the most traded commodity in

the world. According to BBC News, of 18 October, 2007 crude oil is the world’s most

actively traded commodity. The largest markets are in London, New York and Singapore

but crude oil and refined products –such as gasoline (petrol) and heating oil –are bought

and sold all over the world. Petroleum products are used in almost all the industries of

the world economies including the Kenyan economy. As such the oil industry in Kenya

has attracted international and local players. According to Sambu (2010), the market has

over 40 players. However, among the 40 players the market is under the influence of

four firms, Total Kenya is the leader controlling a third of the market, KenolKobil

controls 18.7 per cent, Kenya Shell 17.8 per cent and Oilibya 11.7 per cent. Other

players include Gapco Oil Company, Hass, National Oil Corporation of Kenya (NOCK),

Gulf Energy, Engen, Mogas, and Galana Oil Company.

In the recent past, significant changes have occurred in the business environment in

which organizations in the oil industry operates at the local and international levels.

According to Ondari (2010) the Energy (Petroleum Pricing) Regulations 2010, contained

in a special gazette notice signed by Energy minister Kiraitu Murungi and which will take

effect on December 15, will see marketers making a profit of Sh. 6 at the wholesale level

and Sh. 3 at retail level. This is one of the major governmental changes that have

occurred in the oil industry. The Energy Regulatory Commission (ERC) reviews and

regulates fuel prices on 14th of every month. Before enactment of this law, oil companies

were free to set their own prices based on free market dynamics of supply and demand.

Another change that has occurred is the establishment of a common exchange pool for

LPG gas cylinders and standardization of gas cylinder regulators. All players in the oil

market are required to exchange cooking gas cylinders with rival companies. This change

in the oil industry has stabilized cooking gas prices as any player who retails cooking gas

above the market, will loose out on sales.

5

The expansion strategy by rival companies especially Total Kenya Ltd is the other

change that has occurred. Juma (2011) has noted that, Total Kenya has regained top spot

among oil marketers in Kenya, knocking down its main rival KenolKobil to second place.

Data from the Petroleum Institute of East Africa (PIEA) –the industry lobby –shows that

Total’s market share climbed from 22.6 percent in June to 23.7 percent in September,

making it the largest player in terms of local sales.

Macharia (2012) has noted that Kenya announced on Monday its first oil discovery,

saying it was found in the northern part of the country where British Tullow Oil Plc has

been conducting exploratory drilling. Kenya and East Africa region have become an

international hot spot for oil and gas exploration after commercial oil deposits were found

in Uganda and natural gas in Tanzania. The discoveries of oil deposits in Kenya and

Uganda and LPG in Tanzania are the other significant changes that have occurred.

Tullow Oil PLC has been exploring for oil in Uganda leading to discovery of oil.

Escalating international crude oil prices are the other major change that has occurred in

the oil industry. Current fuel prices are the highest ever, not only here in Kenya but all

over the world. High prices have adversely affected demand for fuel and oil companies

are therefore reporting reduced profits and huge losses.

The opening up of Eastern Europe, the Gulf crisis, slowdown in the world economy and

increased demand of oil especially in China and Japan have posed real challenges for

managers in the oil industry. This has made it increasingly difficult for oil companies to

succeed in the turbulent environment.

Upheavals in the oil producing countries such as Libya, South Sudan and Sudan are the

other changes that have affected oil supply in the international market. Instability in

these countries has disrupted oil production reducing oil supply in the international

market leading to high prices of the commodity.

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Increased piracy activity in the Horn of Africa has resulted in a number of oil tankers

carrying fuel to Kenya and other destinations being captured and detained by pirates. As

a result of this piracy, the insurance premiums for vessels carrying oil and passing

through the Indian Ocean corridor have increased significantly and this has adversely

affected local fuel prices.

The above are some of the major changes that have occurred in the oil industry and it can

be assumed that oil companies, especially the major players are responding to these

changes. KenolKobil Limited is one of the major players in the oil industry and has

therefore been chosen in this study to examine the strategic responses that the company

has adopted to cope with the above changes.

Oil plays a strategic and key role in the economy of all the countries of the world. Thus,

governments all over the world keep a keen eye on the oil industries mostly to avoid

disruption and adverse economic consequences. The oil industry is an important sector in

the economy and oil prices affect almost all the sectors of the national economy.

Normally, an increase in prices of oil products, affect the prices of all other commodities

across the economy. This is how important the oil industry is and this makes it a very

interesting area of study to understand how oil companies are responding to changes in

the macro-environment.

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1.1.4 KenolKobil Limited

KenolKobil Limited is a public Company, listed in the Energy and Petroleum segment at

the Nairobi Stock Exchange (NSE). KenolKobil is a Company on the rise and its strategy

of expansion into new markets was adopted in 1999. The KenolKobil Group is Africa’s

fastest growing indigenous oil marketing conglomerate with an expansive investment

portfolio spanning the entire Eastern, Central and Southern parts of the African continent.

The Group consists of subsidiaries in nine African Countries outside Kenya Head Office.

In addition to Kenya, KenolKobil is in Uganda, Tanzania, Rwanda, Zambia, Ethiopia,

Zimbabwe, Mozambique, Congo DR. and Burundi. The Company has grown

tremendously to become one of Africa’s leading corporate brands.

In addition to venturing into new markets, the Company has been aggressively

strengthening its existing business through acquisition of new assets as well as innovation

of new products. The KenolKobil Group strong business model coupled with visionary

leadership provided by the Company’s professionally constituted Board of Directors and

Management team have seen the Company post impressive results over the years.

According to the company’s Bulletin of first half 2011, KenolKobil Vision is to be the

leading brand in every market the company operates in, and a major player in Africa.

The Mission of the company is to develop, improve and increase quality and total value

of its products and services; become a market leader through continuous innovation,

customer focus and to provide the highest quality products and services; maintain a

highly motivated and well trained human resource base and deliver the highest

shareholder value. The company’s business strategy is to continue with geographical

expansion and diversification, focus on opportunity in a continuously competitive

environment with an adaptive approach, pursue niche business lines; LPG, Lubricants,

non-fuels etc to supplement declining retail margins, pursue enhancement of product

storage to ensure uninterrupted supplies to Network and other customers and constructive

collaboration and communication with individual dealers to attain optimum site potential.

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1.2 Research problem

Today organizations operate under a dynamic and ever changing business environment

and need to respond to changes in the external environment by realigning their strategies

to the changing macro-environment. Failure to respond to changes in the business

operating environment is likely to result in the failure of the organization. Changes in the

macro-environment have placed managers of organizations in a state of alertness. In

order to survive this dynamic environment, organizations need strategies to deal with

emerging environmental changes. It is therefore important for organizations to respond

appropriately to changes in the macro-environment in order to remain viable. Crafting

and implementing cutting-edge strategies to respond to changing business environment

has become an endless preoccupation for many market leaders.

The Kenyan oil industry and indeed the general business environment have undergone

tremendous macro-environmental changes. Consequently, there has been pressure on

organizations to respond with strategies formulated to propel them to retain their market

share and competitive position. The oil industry in particular, has witnessed significant

changes in the business environment. The changes that have occurred include

government regulation of fuel prices, creation of a common exchange pool for LPG gas

cylinders, expansion strategy by rival companies, discovery of oil in Kenya and Uganda,

escalating international crude prices, crisis in oil producing countries, increased piracy in

the Horn of Africa, among others.

The environmental turbulence in the oil industry has not spared KenolKobil as a leading

oil marketer because it has no ability to stop the discontinuous changes in the

environment. The best it can do is to strategically respond to these changes to reduce

their undesirable effects on the organization. KenolKobil has the onerous task of

strategically responding to these changes to survive and remain profitable.

9

Recent studies have been done in Kenya to document strategic responses adopted by

various entities to changes in the business macro-environment. Kiptugen (2003) studied

the strategic responses that Kenya Commercial Bank Limited has adapted to changing

competitive environment. In another study, Ngaluma (2008) researched on the strategic

responses of the Kenya Electricity Generating Company to changes in the external

environment. Ndoti (2008) on the other hand studied the strategic and operational

responses by Kenya Petroleum Refineries Limited to challenges in the competitive

business environment.

Namenya (2008) study was on responses of National Bank of Kenya to competitive

forces in the banking industry. Another study by Njogu (2007) was on the strategic

responses by Schindler Kenya Limited to changes in the environment. On the other hand

Gitonga (2008) study was on the response strategies of Equity Bank Limited to

competition in the Kenyan banking industry.

Due to contextual differences in sectors in which different entities operate as well as

managerial differences among the organizations, strategic responses gained from other

studies may not be assumed to explain strategic responses adopted by KenolKobil. How

has KenolKobil responded to changes that have occurred in the environment of the oil

industry?

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1.3 Research objective

The objective of this study is to establish the strategic responses adopted by KenolKobil

Limited to changes in the business environment.

1.4 Value of the study

As mentioned earlier, no study has been done on the strategic responses that KenolKobil

Limited has adapted to changes in the business operating environment. This will be an

investigative case study. This study will provide crucial information to the staff of

KenolKobil Ltd on strategic responses taken by management as a result of significant

changes in the business operating environment.

Managers will be able to use this study as a management reference point for strategies

being put in place, both present and future that will ensure their company’s survival and

success over the other companies. It will clearly show justification why various

strategies have been put in place.

The study will also be of value to management practitioners and consultants as it will

provide a corporate lesson of the strategies to be employed and those that need to be

discarded and the relative importance of each. Also to benefit are the students of

strategic management who will learn from the study how to apply strategy in a context of

a fast changing macro-environment. The academia will gain insights into strategic

responses adopted by firms facing increased competition, government price controls as

well as a foundation of further research.

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CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

Literature review is a body of text that aims to review the critical points of current

knowledge to a particular topic. Secondary sources are good sources of literature review

and its goal is to situate the current study within the body of literature. It is important to

review what other scholars have done in this field of strategic management. Thus,

literature that relates organizations to their environments will be very relevant and will be

discussed below. The concept of strategy that relates organizations to their external

environment will also be reviewed. In addition, studies that have been carried out in this

particular area will be reviewed. And lastly, a review of specific strategic responses that

are generally employed by management to realign their organizations to changes in the

business environment will be done.

2.2 Concept of strategy

Strategy like many other concepts in the field of management means different things to

different people and organizations. There is no agreed all embracing definition of

strategy but rather it is an elusive and somewhat abstract concept. Strategy therefore,

should be clearly understood from its operational context. In game theory, for example,

strategy refers to one of the options that a player can choose. That is, every player in a

non-cooperative game has a set of possible strategies, and must choose one of the

choices. According to Gluek, strategy is the unified, comprehensive and integrated plan

that relates the strategic advantage of the firm to the challenges of the environment and is

designed to ensure that basic objectives of the enterprise are achieved through proper

implementation process. The resource-based view (RBV) of the firm emphasizes that the

competitive advantage of firms is based on their ability to possess valuable, rare, costly-

to-imitate and non-substitutable resources and capabilities (Butler et al., 2010)

12

Weihrich and Koontz (1993) have observed that the term strategy has been used in

different ways. Some writers focus on both the end points (mission and goals) and the

means of achieving them (policies and plans). Others emphasize the means to the ends in

the strategic process rather than the ends per se. Strategy refers to the determination of

the purpose, and the basic long-term objectives of an enterprise and the adoption of

courses of action and allocation of resources necessary to achieve these aims.

According to Thompson et al., (2008) a company’s strategy is management’s action plan

for running the business and conducting operations. The crafting of a strategy represents

a managerial commitment to pursue a particular set of actions in growing the business,

attracting and pleasing customers, competing successfully, conducting operations, and

improving the company’s financial and market performance. Thus, a company’s strategy

is all about how management intends to grow the business, how it will build a loyal

clientele and outcompete rivals.

Yabs (2010) has observed that the word strategy has its roots in Greek language. It came

from the word strategos, which means the art of an army general in deploying forces to

defeat an enemy. Competition in industry was equated to war tactics and most business

organizations borrowed military terminologies such as strategies, logistics, tactics, staff,

chain of command, and unity of purpose, frontline staff, marketing frontiers, sales force,

tactical maneuvers, strategic alliances and others.

Hunger and Wheelen (2007) have observed that from his extensive work in this field,

Bruce Henderson of the Boston Consulting Group concluded that intuitive strategies

cannot be continued successfully if the corporation becomes large, the layers of

management increases, or the environment changes substantially. The increasing risks of

error, costly mistakes, and even economic ruin are causing today’s professional managers

to take strategic management seriously in order to keep their companies competitive in an

increasingly volatile environment.

13

Yabs (2010) has defined strategic management as the art of mobilizing resources and the

science of formulating, implementing, and evaluating decisions that enables an

organization to realize its objectives. Strategic management is used to refer not only to

the general plans of an enterprise, but also to the process of incorporating environmental

factors in decision making. Management of the enterprise take into consideration all

factors both external to the firm and internal in order to improve the chances of success.

The major aim of strategic management can be viewed as to lessen the future

uncertainties and to minimize surprises.

As can be observed from the above, there are many definitions of the concept of strategy

given by different authors, each giving definition depending on the objective of his/her

research. Overall, the strategies give direction and purpose to deploy resources in the

most effective manner, and to coordinate the stream of decisions being made by different

members of the organization.

2.3 Organizations and the environment

The environment under which the organizations operate is infinite and includes

everything outside the organization. Organizational environment that can be considered

important consist of elements that exist outside the boundary of the organization and have

the potential to affect all or part of the organization. Machuki and Aosa (2011) have

noted that the environment of an organization is composed of an infinite set of elements

outside the boundaries of the organizations, associations of individuals, and broad forces

represent important segments of the organization’s environment.

Yabs (2010) has noted that macro-level environmental forces are all those forces that are

external to the firm. Macro-level environment refers to the national environment in

which the firm operates. This is opposed to micro-level environment that refers to

individual industrial sectors or even to an individual firm’s environment.

14

There are three types of environments of the firm: External remote environment, External

Industry or Immediate or Operational Environment and Internal Environment. Remote

environment refers to factors that are far from the firm but influence its operations. They

include politics, economics of a country, social factors, technological factors and

ecological factors. These factors have been termed PESTEL. Industry or operational or

immediate environmental forces refers to the factors slightly closer to the firm such as

customers, suppliers, employees, and other firms having dealings with the company

(Yabs, 2010).

Strategic management is a process and includes environmental scanning (both external

and internal), strategy formulation (strategic planning), strategic implementation, and

evaluation and control. Strategic management emphasizes the monitoring and evaluating

of external opportunities and threats in light of a corporation’s strengths and weaknesses

in order to generate and implement a new strategic direction for an organization.

Distinguishing between the external and the internal environment of the firm is common

to most approaches to the design and evaluation of business strategies. One well-known

approach is the SWOT framework: Strengths, Weaknesses, Opportunities, and Threats.

This framework distinguishes between two features of the internal environment, strengths

and weaknesses, and two features of the external environment, opportunities and threats.

However, the SWOT framework is handicapped by difficulties in distinguishing strengths

from weaknesses and opportunities from threats (Yabs, 2010).

Hunger and Wheelen (2007) have defined strategic management as that set of managerial

decisions and actions that determines the long-run performance of a corporation.

Strategic management includes environmental scanning (both external and internal),

strategy formulation, strategy implementation, and evaluation and control. Crafting and

executing strategy are the heart and soul of managing a business enterprise.

15

According to Thompson et al., (2008) the managerial process of crafting and executing a

company’s strategy consist of five interrelated and integrated phases. These phases are

strategic vision, objective setting, crafting a strategy, implementing and executing the

chosen strategy, and strategy evaluation and control. Strategic management is key to the

survival in a turbulent business environment which characterizes today’s business

environment where change is the only constant factor. There is no single industry or

company that is able to escape the environmental winds of change. Effective strategic

management appears to be the answer to company’s management in effectively and

efficiently coping with changing business environment.

2.4 Strategic responses

Hunger and Wheelen (2007) have noted that companies often respond differently to the

same environmental changes because of differences in the ability of managers to

recognize and understand external strategic issues and factors. Few firms can

successfully monitor all important external factors. According to Thompson et al.,

(2008) to respond to changes in the external environment, companies in most all

industries have to craft strategies that are responsive to environmental regulations,

growing use of the internet and broadband technology, and energy prices. However, the

factors and forces in a company’s macro-environment having the biggest strategy-

shaping impact typically pertain to the company’s immediate industry and competitive

environment, actions of rival firms, buyer behavior, suppliers’ considerations and so on

Companies in all types of industries have adopted strategic alliances and partnerships to

complement their own strategic initiatives and strengthen their competitiveness in

domestic and international markets. Thompson et al., (2008) have noted that a strategic

alliance is a formal agreement between two or more separate companies in which there is

strategically relevant collaboration of some sort, joint contribution of resources, shared

risk, shared control, and mutual dependence. In most cases strategic alliances involve

joint sales or distribution, joint production, joint research et al.

16

Another strategic response that organizations employ is mergers and acquisition.

Thompson et al., (2008) have noted that combining the operations, via merger or

acquisition is an attractive strategic option for achieving operating economies,

strengthening the resulting company’s competences and competitiveness, and opening up

avenues of new market opportunity. Many mergers and acquisitions are driven by

strategies to achieve cost efficient operations out of the combined companies, to expand a

firm’s geographic coverage, to extend the firm’s business into new product categories, to

gain access to new technologies or other resources and competitive advantage, and to try

to invent a new industry.

Companies also employ vertical integration strategies enabling them to operate across

more stages of the industry value chain. Vertical integration extends a company’s

operations and competitiveness within the same industry and involves expanding the

company’s range of activities backward into suppliers of inputs and/or forward toward

the final consumers (Thompson et., 2008). The main reasons for investing company

resources in vertical integration are to strengthen the firm’s competitive position and to

enhance its profitability.

Outsourcing is another strategic response that is widely employed by organizations. It

involves a conscious decision to abandon attempts to perform certain value chain

activities internally and instead give them out to outside vendors and strategic allies. The

two big drivers for outsourcing are that outsiders can in most cases perform certain

activities better and/or cheaper and it allows a firm to focus its entire energies on its core

activities that are the most critical to its competitive and financial success. According to

Thompson et al., (2008) the current interest of many companies in making outsourcing a

key component of their overall strategy and their approach to supply chain management

represents a big departure from the ways companies used to deal with their suppliers and

vendors.

17

Offensive strategic responses have been employed by most companies to improve their

market position. Offensive strategies are important when a firm has no choice but to try

to whittle away at a strong rival’s competitive advantage and gain profitable market

share. Thompson et al., (2008) have noted that a blue ocean strategy seeks to gain

dramatic and durable competitive advantage by abandoning efforts to beat out

competitors and instead inventing a new industry or distinctive market segment.

Consequently, according to Butler et al., (2010) to survive in a fast-paced environment,

firms must embed flexibility into their strategic actions. Turbulent environments call for

organizations to be able to detect and create new opportunities and then select those that

are worthy of actual resource allocation in order to be exploited for the firm’s benefit.

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CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

Research methodology deals with the description of the methods applied in carrying out

the research study. The research methodology includes the design of the research, data

collection procedures and analysis of the collected data using available tools.

3.2 Research design

A case-study approach was employed to identify strategic options KenolKobil Ltd has

adopted due to changes in the business operating environment. According to Kombo and

Tromp (2006) a research design and methodology can be regarded as an arrangement of

conditions for collection and analysis of data in a manner that aims to combine relevance

with the research purpose. It is the conceptual structure within which research is

conducted. Case studies bring out very focused and valuable insights to phenomena that

may otherwise be vaguely known or understood. Case studies also enrich generalized

knowledge and make it possible for the researcher to use one or more methods depending

upon the prevailing circumstances for example in-depth interviews and questionnaire.

Kombo and Tromp (2006) notes that a case study seeks to describe a unit in detail, in

context and holistically. It is a way of organizing educational data and looking at the

object to be studied as a whole. In a case study, a great deal can be learned from a few

examples of the phenomenon under study.

KenolKobil is a major player in the oil industry and a public quoted company. This made

the company a suitable candidate for this study and also a good representative of other

major players in the oil industry that are facing similar challenges. Case studies have

been used in other studies and proved successful for example by Mbogo (2003).

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3.3 Data collection

Both primary and secondary data was used for this study and effort has been made to

ensure the validity and reliability of the data collection exercise. This is an important

approach for a case study design which calls for several source of information to be used

for verification and comprehensiveness. Kombo and Tromp (2006) have observed that,

data is collected to further a researcher’s understanding of a puzzling issue. Further, data

collection is a vital component in research as it is through the collected information that

research findings are made, recommendations offered and the way forward formulated.

The primary data collection instrument was interview guide that was hand-delivered to

the respondents at KenolKobil Ltd. Data collection method used to collect data by the

researcher was booking appointments with the senior management of KenolKobil Ltd

and delivering the interview guides to their offices. From the interview guide questions,

the researcher got written answers.

Data collection involved obtaining data by communicating with respondents and asking

them questions. Respondents were asked a set of open-ended questions concerning the

organization, changes in the macro-environment and KenolKobil Ltd strategic responses

to the changes. In addition to the data collected through the interview guide, available

company documents, audited accounts, newspaper articles, magazine articles, company

catalogs and other available secondary information pertinent to the firm were used to

collect additional data.

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3.4 Data analysis

Data from interview guides and secondary sources have been summarized according to

study theme of strategic responses adopted by KenolKobil Ltd to deal with changes in the

business environment. Content analysis was used to analysis the data collected from the

respondents. According to Kombo and Tromp (2006) content analysis examines the

intensity with which certain words have been used. Content analysis systematically

describes the form or content of written and/or spoken material. Content analysis is a

technique of making inferences by systematically and objectively identifying specific

characteristics of messages and using the same approach to relate to trends.

The approach of content analysis has been used previously in similar research projects,

such as the one by Muriithi (2008). He argues that this method is scientific as the data

collected can be developed and verified through systematic analysis. The qualitative

method can be used to uncover and understand what lies behind a given phenomenon

under study. This type of analysis is suitable as it does not limit respondents on answers

and has the potential of generating much more detailed information.

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CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION

4.1 Introduction

This chapter deals with analysis of the data and interpretation of the research findings.

The data in this study was content analyzed in order to find out the changes that have

occurred in the oil industry and the strategic responses adapted by KenalKobil to these

changes. Set out here below are the changes that have occurred in the business

environment of the oil industry and strategic responses by KenolKobil.

4.2 Environmental changes facing Kenolkobil in Kenya

Changes in the business environment generally affect the long term viability and

profitability of the organization and thus require timely and appropriate strategic

responses in order for the firm to survive and prosper. All the respondents interviewed

acknowledged that significant changes have occurred in the business environment in

which KenolKobil operates.

One of the significant changes acknowledged by all the respondents was the regulation of

fuel prices by the government effective December 2010. The government controls the

maximum prices that oil companies sell the fuel to the motorists. Adherence to the prices

is mandatory and failure to do so attracts heavy fines and/or cancellation of the operating

license.

Another change cited by the respondents is volatile and high international crude oil prices

that the industry is facing. The respondents observed that the current prices in the market

are the highest the industry has witnessed and the projection of higher prices in future.

Respondents were apprehensive that high prices will suppress demand and adversely

affect the performance of KenolKobil.

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The expansion of rival companies especially Total Kenya is another change that was

acknowledged by the respondents. In a move that involved acquisition of Caltex petrol

stations in Kenya, Total Kenya is now number one oil marketer in Kenya in terms of

market share overtaking KenolKobil. In a deal agreed with the government, some of the

Caltex service stations were acquired for the state oil corporation, National Oil

Corporation of Kenya.

According to the respondents another significant change that has occurred in the industry

is the establishment by the government of a cooking gas exchange pool where oil

marketers exchange gas cylinders with rival companies. Through the exchange pool, the

oil marketers have standard cooking gas cylinder fitted with standard gas regulators and

to accept gas cylinders from rival companies at the retail level.

The respondents cited the increased piracy in the horn of Africa as another change that

has affected the oil industry. The respondents lamented the high increase in the

insurance premiums and delays in ship docking at Mombasa Port due to increased piracy

activities. The delay in delivery of oil has resulted in fuel shortages in the market and

this has affected revenues and profits of oil marketers.

Another significant change that was cited by the respondents is the purchase of fifty one

percent of Kenya Petroleum Refineries Ltd by Essar of India and elevation of the refinery

facility to a merchant status. Oil marketers are apprehensive that the inefficiencies at

Kenya Petroleum Refineries Ltd will delay supply and delivery of oil into the market.

The respondents lamented that unless the refinery is managed professionally,

inefficiencies at the refinery will make oil products even more expensive.

The respondents cited another change as the upheavals in the oil producing countries that

have affected the supply of oil in the industry. The upheavals have adversely affected the

oil outputs in the market distorting the supply level thus increasing fuel prices and this

has eroded the margins of oil marketers.

23

Other changes acknowledged by most respondents are oil discovery in Uganda and

cooking gas in Tanzania. These discoveries have implications on the operations of

KenolKobil in these two countries where the company has set up operations.

4.3 Strategic responses

According to Ansoff and MacDonnell (1990) strategic management is concerned with

creating a strategic position which assures future environment viability of the

organization. The strategic analyst of every firm is concerned with the continued long

term profitability potential. Companies in most all industries have to craft strategies that

are responsive to environmental regulations, technology, actions of rival companies,

political and social economic factors. Failure to respond to changes in the environment

may threaten the survival of the firm.

4.3.1 Strategic alliances and partnership

A strategic alliance is a formal agreement between two or more separate companies in

which there is a formal agreement between two or more separate companies in which

there is strategically relevant collaboration, joint contribution of resources, shared risk,

shared control and mutual dependence Thompson et al., (2008). In one of the monthly

management meetings the Chief Executive Officer of KenolKobil informed the

management that the Board of the Directors had directed the management to look for a

strategic partner to take the company to the next level. Following the board resolution,

the management of KenolKobil started negotiations with a strategic partner Puma Energy

of Switzerland. Puma Energy is an international oil company that is seeking to enter the

local oil market for the first time by acquiring a controlling interest of KenolKobil Group.

The partnership will complement the companies own strategic initiatives and strengthen

KenolKobil competitiveness in domestic and regional market.

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Puma Energy operates in other key oil markets in Africa and has the financial capacity

and technical know-how to operate across borders and is expected to strengthen the

expansion strategy of KenolKobil to be a Pan-African oil marketer. It is expected that the

expansion strategy that Kenolkobil has been pursuing will be greatly enhanced by the

partnership with Puma Energy both locally and regionally.

In another strategic alliance, KenolKobil jointly operates the Nairobi Joint Depot (NJD)

with Total Kenya Ltd. In this arrangement the two oil marketers share overhead costs to

reduce their operational costs and also loan each other fuel in case one has a shortfall.

This strategic partnership is unique as other players operate individually. Strategic

partnership may experience significant drawbacks due to the potential for conflicting

objectives, disagreement over how to best operate the joint depot, and so on.

4.3.2 Regional expansion

As noted by Thompson et al., (2008) when a company has resource strengths and

capabilities suitable for competing in other countries markets, launching initiatives to

transfer its expertise to cross-border markets becomes a viable strategic option. One of

the strategic responses that KenolKobil has adapted is regional expansion spanning the

entire Eastern, Central and Southern parts of the African continent. This expansion is in

top gear especially with the introduction of fuel price regulation in Kenya in 2010 and

aggressive marketing by rival companies to gain market share in the local market.

KenolKobil regional expansion is especially targeting countries where the market thrives

on the market economies of demand and supply.

The regional expansion strategy is guided by management opinion that when the

economy in one country is not doing well the other economies are most unlikely to be

experiencing the same economical phenomenon. This will therefore cushion KenolKobil

operations against adverse economic impact on its overall profitability. The regulatory

frameworks of individual countries where Kenolkobil operates are different and this may

poses both opportunities and threats

25

Furthermore the expansion strategy decision was also informed by the fact that a number

of corporate and individual customers that use the K-card fuel card of KenolKobil have

operations across the regional block. In order to serve these customers in most if not all

locations KenolKobil management decided to follow there customers across the

boundaries. Local managers were seconded to the neighboring countries to oversee the

operations of KenolKobil Ltd.

4.3.3 Outsourcing

A study by Ngaluma (2008) researched on the strategic responses of the Kenya

Electricity Generating Company to changes in the external environment. The study

found out that the company had outsourced its non-core activities. Outsourcing involves

a conscious decision to abandon or forgo attempts to perform certain value chain

activities internally and instead to farm them out to outside specialists and strategic allies

Thompson et al., (2008). The two big drivers for outsourcing are that outsiders can often

perform certain activities better or cheaper and it allows a firm to focus its entire energies

on those activities at the center of its expertise and that are the most critical to its

competitive and financial success.

KenolKobil has employed the strategy of outsourcing non-core business activities of

transporting fuel to their fuel service stations to transporting and logistic companies.

Outsiders can in most cases perform certain activities better and/or cheaper and this

allows KenolKobil to focus its entire energies on its core activities of oil marketing that is

critical to its success. This strategic response was informed by the fact that maintaining a

fleet of tankers to transport fuel, ensuring safety of the fuel in transit, maintenance of the

trucks and other logistics and administrative would divert KenolKobil from its core

business and is also expensive.

26

The outsourcing strategy is also used in the maintenance of KenolKobil machineries and

equipments at all the fuel stations. KenolKobil has contracted firms that specialize in the

maintenance and servicing of fuel pumps and these firms offer twenty four hours services

to all service stations. The contracted firms ensure minimum down time in dispensing of

fuel in the entire fuel stations network. Other outsourced services include security,

cleaning services and cash in transit to the bank by G4S.

4.3.4 Aggressive marketing

According to Thompson et al., (2008) aggressive moves to capture a bigger market share

invite cutthroat competition, especially when many industry members, plagued with high

inventories and excess production capacity, are also scrambling for additional sales.

Firms employ aggressive marketing to wrest market share away from rivals that often

provoke retaliation in the form of escalating marketing and sales promotion or a price war

to the detriment of everyone’s profits. Offensive strategic responses are employed by

firms to improve their market position and to try to build a competitive advantage or

widen an existing one.

KenolKobil has come up with a fuel card marketing tool that is based on a software

similar to the Mpesa money transfer. The K-Card enables the motorist to load money

into the card at any KenolKobil service station and to use the card to fuel at any

KenolKobil service station. In addition the card offers the motorist a discount on all

purchases through a promotion campaign dumped “Deal Poa.” The K-card has captured

and locked-in a clientele base that fuel at KenolKobil service stations at a discount thus

protecting the market share from rival firms.

The company has been aggressively marketing its products to corporate customers that

use huge volumes of fuel and lubricants. These organizations include Kenya Tea

Development Authority, Kenya Power and Lighting, Kenya Airways, Kenblest, Nairobi

Water and Sewerage Company, among others. These are high value customers and a

niche market outside the service stations network and because of their high volumes the

company offers them a discount graduated on volumes purchased each month.

27

The service station dealers also enjoy incentives known as sliding scale whereby on

reaching certain volumes per month, the dealer gets monetary reward for every litre of

fuel sold over and above the target volumes. The target volumes are guided by the

location of the stations and the proximity of the competition. Dealers are encouraged to

offer exemplary services to the customers to ensure loyalty and repeat orders so as to

reach the set targets.

4.3.5 Low cost strategy

Thompson et al., (2008) have noted that striving to be the industry’s overall low-cost

provider is a powerful competitive approach in markets with many price-sensitive buyers.

A company achieves low-cost leadership when it becomes the industry’s lowest-cost

provider rather than just being one of perhaps several competitors with comparatively

low costs.

For maximum effectiveness, companies employing a low-cost provider strategy need to

achieve their cost advantage in ways difficult for rivals to copy or match. KenolKobil is

a major player in the monthly fuel open tender system (OTS) where oil marketers tender

to import and supply all other marketers with fuel for a whole month. Oil marketers

tender every month to the Ministry of energy and the lowest bidder is awarded the tender.

KenolKobil has been aggressive in the OTS by quoting low prices and winning tenders.

4.3.6 Vertical and horizontal integration

Thompson et al., (2008) have noted that vertical integration extends a firm’s competitive

and operating scope within the same industry. It involves expanding the firm’s range of

activities backward into sources of supply and/or forward toward end users. The strategic

impetus for forward integration is to gain better access to end users and better market

visibility.

28

The best potential for being able to reduce costs via a backward integration strategy exists

in situations where suppliers have outsized profit margins, where the item being supplied

is a major cost component, and where the requisite technological skills are easily

mastered or can be gained by acquiring a supplier with the desired technological know-

how. KenolKobil has extended its operations and competitiveness by expanding the

company’s range of activities backward into suppliers of inputs. KenolKobil directly

imports oil and also use tankers to transport oil from the port instead of using the Kenya

Pipeline Company facilities that are sometimes unreliable. The company has also

invested heavily in fuel service stations by outright ownership instead of entering into

long-term leasing agreement with landlords of service station facilities.

In addition to entering into dealership agreements, KenolKobil has company run fuel

service stations. In this arrangement the oil marketer sells fuel direct to motorists and

employees of KenolKobil Ltd operates the fuel service station on o day-to-day basis.

These service stations are known as company run. This strategy is employed for newly

acquired fuel service station as the Company searches for a dealer to run the station. The

company’s new business manager is on the look out for new strategic sites where the

Company can build new service station or hire from independent operators.

4.4 Discussion

Organizations are open systems that get their inputs from the external environment,

process the inputs into products that are offered back to the environment as goods and

services. Butler et al., (2010) have noted that nowadays corporations are challenged by

dynamic environments with a rapid speed of changes, burgeoning complexity and

increased uncertainty. Firms must be able to cope with unplanned situations which

cannot be predicted in advance. KenolKobil Ltd has in the recent past faced a dynamic

environment due to significant changes have occurred in the oil industry that include

regulation of oil prices by Energy Regulatory Commission (ERC), standardization of

cooking gas regulators, escalating international crude oil prices, upheavals in oil

producing countries among other changes.

29

The environmental turbulence in the oil industry has not spared KenolKobil as a leading

oil marketer because it has no ability to stop the discontinuous changes in the

environment. The best KenolKobil can do is to strategically respond to these changes to

reduce their undesirable effects on the organization.

4.4.1 Comparison with other theories

Hunger and Wheelen (2007) have noted that companies often respond differently to the

same environmental changes because of differences in the ability of managers to

recognize and understand external strategic issues and factors. Few firms can

successfully monitor all important external factors. To optimize profitability in a

turbulent environment, the responsiveness of an organization’s strategy must match the

turbulence in the environment but also the organization’s capabilities should match the

aggressiveness of its strategy. Therefore, the logic relating environment to strategy and

in turn to performance is compelling, but empirical demonstrations of the relationships

have only recently been made for developed countries (Machuki and Aosa, 2011). The

respondents answers have revealed that KenolKobil constantly monitor the environment

and has employed generic strategies to changes in the external environment.

KenolKobil has been searching for strategic partners to help the company in its regional

expansion the company has expanded its operation in Eastern and Central Africa,

outsourcing its non-core operations, vertical and horizontal integration of its operations

among other strategic responses. KenolKobil has put into practice, strategic management

by adopting some of the generic strategies in responding to changes in the external

environment.

4.4.2 Comparison with empirical studies

Strategic responses adopted by KenolKobil Ltd to changes in the business environment

are similar to those employed by other firms. Empirical studies have been done in the

past to document strategic responses adopted by various firms to changing business

environment. For example Kiptugen (2003) found out that, as a result of the economy’s

progressive decline, legislative changes, liberalization, and technological advances,

30

Kenya Commercial Bank had responded by restructuring its operations, through closure

of branches, disposal of non-core assets, development of new marketing strategies,

acquisition of an information technology system, and culture change.

In another study, Ngaluma (2008) found out that Kenya Electricity Generating Company

used various strategies such as diversification, adoption of up-to-date technology, astute

management, and expansion to respond to changes in the external environment. Ndoti

(2008) found out that Kenya Petroleum Refineries (KPRL) had responded to challenges

in the competitive business environment by switching to production of unleaded fuel,

diversification into product related services, joint venture projects, rigorous personnel

training and development, and a five year strategic plan to address the numerous

challenges facing the company. In addition, Njogu (2007) found out that Schindler

Kenya Ltd responded to changes in the environment by paying greater attention to the

needs of the customers, restructuring, sales aggressiveness, and introducing new

products.

Generally, organizations are not immune to environmental turbulence and have no ability

to stop the discontinuous changes in the environment. The best they can do is to respond

to the changes in order to reduce the adverse effects on the company’s operations and

performance. Changes in the macro-environment may occur rapidly or slowly, with or

without advance warning and the impact on a company’s choice of strategy can range

from big to small. Failure to respond to changes in the business environment may result

in the failure of the organization

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CHAPTER FIVE: SUMMARY, CONCLUSION AND

RECOMMENDATIONS

5.1 Introduction

This chapter presents the summary, discussions and conclusions from the research

findings as per the objective of the study. Based on the findings, recommendations have

been given regarding the changes facing KenolKobil and the strategies being put in place.

The limitations of the study as well as suggestions for further research are also discussed.

5.2 Summary of findings

The study sought to identify the changes that have occurred in the business environment

in which KenolKobil operates and to establish the strategic responses adapted by

KenolKobil to these changes. Key changes and responses from the findings and

discussions in chapter four are summarized here below.

The capping of fuel prices and standardization of cooking gas cylinders by the

government are the most significant changes that have occurred in the market. These

have adversely affected the performance of KenolKobil Ltd. The regulations contradict

the economic rule of free market forces of demand and supply and where prices are

determined by these forces. The second significant change is the expansion strategy by

rival companies that have reduced the market share of KenolKobil.

KenolKobil has strategically responded to these changes by expanding its operations

regionally to become a Pan-African oil marketer. The company is able to operate in free

market economies and maximize profits in other regions. The other significant response

is the negotiations to bring on board a strategic international partner, Puma Energy. This

alliance will put the company in the same financial position and international best

practices among other multinationals such as British Shell and Total of French. Thirdly,

the launching of the fuel card, K-Card is another significant response that has

transformed how motorists fuel their vehicles in a most convenient way that is cash-less.

32

5.3 Conclusion

The study established that KenolKobil Ltd interacts with the external environment in

form of an open system by drawing inputs from the environment, processing the inputs

into outputs that it offers to the environment in form of products. Thus, changes in the

external environment especially in the oil industry have a direct impact on the operations

of the firm. Indeed the capping of fuel prices has an adverse effect on the profitability of

KenolKobil and in 2012 the company reported the highest loss in its history. The

company has been monitoring the changes occurring in the environment and responding

appropriately by reviewing and re-aligning its strategies

In response to the changes in the oil industry, the study concludes that KenolKobil should

reflect more on raising money to finance the regional expansion strategy by getting a

strategic partner and/or raising additional capital through the Nairobi Stock Exchange by

issuing corporate bonds or rights. In addition the company should take up price

differentiation strategies such as offering discounts on fuel prices to royal customers who

are the holders of K-Card. On product differentiation strategies, KenolKobil should

launch cooking gas with meters that will show the consumers the level of gas remaining

in the cylinders. KenolKobil can brand other products like battery water and battery acid.

The study concludes that the strategies that have been adapted by KenolKobil to changes

in the business environment have generally been highly effective.

5.4 Recommendations

This study will provide crucial information to the staff of KenolKobil Ltd on strategic

responses being taken by management as a result of significant changes in the business

operating environment. Managers will be able to use this study as a management

reference point for strategies being put in place, both present and future that will ensure

their company’s survival and success over the other companies. It will clearly show

justification why KenolKobil want to implement the regional expansion strategy and

become a Pan-africal oil marketer. It is recommended that the management of

KenolKobil Ltd continues to search for a strategic partner after the collapse of

negotiations with Puma Energy.

33

KenolKobil Ltd can also explore the option of issuing rights issue to the existing ordinary

shareholders to finance the regional expansion. It is also recommended that the company

explore the option of issuing a long term corporate bond to finance the expansion. The

financing option through corporate bond has been used by other firms quoted at the stock

exchange including KenGen and Barclays bank.

KenolKobil Ltd management can explores the possibility of linking the K-card to the

Mpesa money transfer system to facilitate loading K-card with funds from Mpesa. A

number of firms including Kenya Power and Nairobi Water and Sewerage Company have

partnered with Safaricom Ltd to facilitate payment of bills through Mpesa. Similar

arrangement can be put in place at all KenolKobil service stations.

In order to have a lean and efficient organization structure KenolKobil management can

decide to restructure the organization. Restructuring has been employed successfully by

other oil marketers like Kenya Shell Ltd to reduce the wage bill and remain profitable.

Restructuring strategy has been used successfully by other quoted companies at the

Nairobi Stock Exchange for example Kenya Commercial Bank.

Management practitioners and consultants will benefit from this study. They will be in a

position to evaluate the strategies that have worked for KenolKobil Ltd and those that

have failed to make informed decisions and recommendations to their clients. Students

of strategic management and academia will benefit from this study as they will learn how

to apply strategy in a fast changing business environment. They will also gain insights

into strategic responses adopted by firms to various changes in the business environment

and can also use this study as a foundation of further research.

34

5.5 Limitations of the study

Since this was a study on one oil marketer, KenolKobil Limited, data gathered might

differ from strategic responses adopted by other oil marketers. This is because different

organizations even if operating in the same industry adopt different strategies that

differentiate them from their counterparts. The study however, constructed an effective

research instrument that sought to elicit general and specific information on the strategic

responses adopted.

The study faced both time and financial constraints. The duration that the study was

conducted was limited hence exhaustive and extremely comprehensive research could not

be carried out on strategic responses. Due to limited finances the study could not be

carried out on all the operational centers of KenolKobil Ltd. The study, however,

minimized the adverse effects of these limitations by conducting the interviews at the

organizations headquarter since this is where strategies are made and rolled out to other

operational areas.

5.6 Suggestions for further research

The environment under which all types of organizations operate is dynamic and ever

changing. The scope of the study can be extended to cover other companies facing

macro-environment changes in their operating environment including other oil marketers

in Kenya. Managements of different firms are different and therefore the way one

management will respond to different changes will be different.

A further study can be carried out to investigate the challenges facing KenolKobil in

implementing its regional expansion strategy. Since 1999, KenolKobil has been

expanding in the regional market and therefore it would be interesting to carry out a study

that will investigate the strategy implementation process.

35

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APPENDICES

Appendix: I

LETTER OF INTRODUCTION

JUNE 8, 2013

The Respondent KenolKobil Ltd

Dear Respondent

RE: REQUEST TO COLLECT DATA FOR MBA RESEARCH PROJECT

I am a student at the University of Nairobi in the School of Business pursuing a degree of Masters of Business Administration. I am conducting a research study on “strategic responses adopted by KenolKobil Ltd to changes in the business environment in Kenya”.

To undertake the research study you have been selected to participate in this study as a respondent. The study will focus on face to face interview where the researcher will pose guided questions in a session lasting about 30 minutes. The information provided will be treated in strict confidence and used for academic purpose only. A copy of the final report will be available to you upon request.

Your assistance and cooperation will be highly valued and I remain,

Yours faithfully,

Stephen N. Kinyanjui Professor Evans Aosa MBA Student No. D61/70177/2009 University Supervisor

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Appendix II

INTERVIEW GUIDE

Section A. Respondent’s profile

Name (optional) …………………………………………………………….

Position held ………………………………………………………………….

How long have you worked in this position? ………………………………….

How long have you worked in KenolKobil Limited? ………………………….

Section B. Changes in the business environment facing KenolKobil Ltd

1. Describe the significant changes that have taken place within the last 5 years in the business environment which have affected KenolKobil Ltd (e.g. changes in technology, government regulations, increased competition, etc)

2. What is the impact of these changes to KenolKobil Ltd and how has KenolKobil Ltd been affected?

Section C. Strategic responses

3. Has KenolKobil Ltd responded to these changes? Yes/No

4. Explain in details how KenolKobil has responded to these changes.

5. Are there any changes that KenolKobil has not responded to and why?

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